02.01.13

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
– American author Upton Sinclair

There has been a whole bunch of economic mis-information, related to the Great Recession, going around in the MSM for years now. Much of it has to do with anti-Keynesians out there that was exposed when Paul Krugman appeared on Joe Scarborough’s show this week.

If anyone wants to blame the greater severity of the donwturn on the stimulus they would have a hard story to tell. Most of the hit was before a dollar of the stimulus was spent. Employment in March of 2009 was 5.4 million before its year ago level.

Of course CBO was overly optimistic about the pace of the turnaround. It predicted that employment would rise by 1.7 million in 2010 even if we did nothing. Someone may have a story about how this increase would have happened had it not been for the stimulus (lower interest rates?), but it is difficult to envision what that story would look like.

The other point that this chart makes nicely is that the predicted gains from the stimulus were small relative to the size of the downturn. CBO predicted that the maximum benefit from the stimulus would be in 2010 when employment would be 2.4 million higher than without the stimulus. This needs to be repeated a few hundred thousand times the stimulus was only projected to create 2.4 million jobs.

That is not rewriting history or making it up as we go along. This is a projection from an independent agency made at the time the stimulus was passed. The economy ended up losing over 7 million jobs. At its peak impact, the stimulus was only projected to replace 2.4 million of these jobs. And after 2010 the stimulus’ impact quickly went to zero as the spending and tax cuts came to an end.

How can anyone be surprised that the stimulus did not bring the economy back to full employment? No one expected it to be large enough to reverse the impact of a slump of this magnitude.

President Obama and his team deserve lots of criticism for failing to recognize the severity of the downturn. They deserve even more blame for not acknowledging this fact, and that their stimulus was inadequate for the task at hand.

But their errors do not change the reality. The stimulus was not designed to create 7 million jobs. Why would Joe Scarborough or anyone else be surprised to see that it didn’t?

Why? See the quote at the top.

And finally another these pieces of misinformation, that government spending and the size of government has ballooned since President Obama took office. Government spending is at it’s lowest point since the 1950’s, Government outlays rising at slowest pace since 1950s.

f all the falsehoods told about President Barack Obama, the biggest whopper is the one about his reckless spending spree.

As would-be president Mitt Romney tells it: “I will lead us out of this debt and spending inferno.”

Almost everyone believes that Obama has presided over a massive increase in federal spending, an “inferno” of spending that threatens our jobs, our businesses and our children’s future. Even Democrats seem to think it’s true.

Government spending under Obama, including his signature stimulus bill, is rising at a 1.4% annualized pace — slower than at any time in nearly 60 years.

But it didn’t happen. Although there was a big stimulus bill under Obama, federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.

Even hapless Herbert Hoover managed to increase spending more than Obama has.

By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity.

How big a deal is this? Government consumption and investment is about $3 trillion; if it had grown as fast this time as it did in the Bush years, it would be 12 percent, or $360 billion, higher. Given a multiplier of more than one, which is what the IMF among others now thinks reasonable under current conditions, that ends up meaning GDP something like $450 billion higher, which is 3 percent — and an unemployment rate 1.5 points lower.

So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent. It’s a policy disaster.

What all of this shows is that our economic policy since the Great Recession has been all wrong. First a stimulus plan that was way too small, and then austerity and a focus on the deficit.

This could change with a new stimulus, rehiring teachers, and rebuilding our country’s infrastructure, as a start. But nothing will change until more Americans understand it doesn’t have to be like this. See the reality of our recent failed economic policies and demand their government focus on putting people back to work. Until then this depression will continue.